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Corporate Codes of Ethics, National Culture, and Earnings Discretion: International Evidence

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Listed:
  • Chu Chen

    (Eastern Washington University)

  • Giorgio Gotti

    (University of Texas at El Paso)

  • Tony Kang

    (McMaster University)

  • Michael C. Wolfe

    (Virginia Tech)

Abstract

This study examines the role of codes of ethics in reducing the extent to which managers act opportunistically in reporting earnings. Corporate codes of ethics, by clarifying the boundaries of ethical corporate behaviors and making relevant social norms more salient, have the potential to deter managers from engaging in opportunistic financial reporting practices. In a sample of international companies, we find that the quality of corporate codes of ethics is associated with higher earnings quality, i.e., lower discretionary accruals. Our results are confirmed for a subsample of firms more likely to be engaging in opportunistic reporting behavior, i.e., firms that just meet or beat analysts’ forecasts. Further, codes of ethics play a greater role in reducing earnings management for firms in countries with weaker investor protection mechanisms. Our results suggest that corporate codes of ethics can be a viable alternative to country-level investor protection mechanisms in curbing aggressive reporting behaviors.

Suggested Citation

  • Chu Chen & Giorgio Gotti & Tony Kang & Michael C. Wolfe, 2018. "Corporate Codes of Ethics, National Culture, and Earnings Discretion: International Evidence," Journal of Business Ethics, Springer, vol. 151(1), pages 141-163, August.
    • Handle: RePEc:kap:jbuset:v:151:y:2018:i:1:d:10.1007_s10551-016-3210-y
    DOI: 10.1007/s10551-016-3210-y
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    7. Giorgio Gotti & Tony Kang & Michael C. Wolfe & Yong Keun Yoo, 2023. "Corporate codes of ethics and cash holdings: International evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3387-3418, September.

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